Building: Knowledge, Security, Confidence

1. Borrowing Basics FDIC Money Smart for Young Adults Building: Knowledge, Security, Confidence

2. Purpose • Help you to determine: • How to use credit appropriately • What forms of credit best suit your needs

3. Objectives By the end of this course, you will be able to: • Define credit • Explain why credit is important • Identify three types of loans • Identify the costs associated with getting a loan

4. Objectives (continued) • Recognize that you are protected against discrimination in the lending process • Tell how you are protected against discrimination in the lending process • Identify how you can guard against predatory lending practices • Explain why it is important to be wary of rent-to-own, payday loan, and refund anticipation services

5. Todd, the Cell Phone and the Student Credit Card: Fact or Fiction?

6. Credit • Money you borrow to pay for things • A loan • “Good credit” • Making payments on time • “Bad credit” • Harder to borrow in the future

7. Why is Credit Important • Useful in emergencies • More convenient than carrying cash • Allows for large purchases • May affect your ability to get: • Employment • Housing • Insurance

8. Types of Loans • Credit cards • Consumer installment loans • Home loans

9. Credit Cards • Allow you to borrow money

10. Installment Loans Money you borrow to pay for: • Automobile • Computer • Other personal expenses

11. Home Loans • Home purchase loans • Home refinance loans • Home equity loans

12. Activity 1: Types of Loans • Complete Activity 1 in your Participant Guide • Take 5 minutes to read and complete • Select the appropriate loan type for each type of purchase • Discuss your answers with the class

13. Fees • Annual maintenance fees • Service charges • Late fees

14. Interest Financial institutions charge money at a certain rate to let you use their money: • Fixed • Interest rate stays the same during the term of the loan • Variable • Interest rate may change during the loan’s term

15. How much does credit really cost? Amount Financed APR Finance charge Total paid $5,000.00 12% $600.00 $5,600.00 Beware of “Penalty APRs” and “Universal Default” on credit cards

16. Activity 2: Borrowing Money Responsibly • Complete Activity 2 in your Participant Guide • Work in pairs to answer the questions • Discuss your answers with the class

17. The Four Cs of Credit Decision Making

18. Capacity • Do you have a job? • How much money do you make? • What are your monthly expenses?

19. Capital • How much money do you have in your checking and savings accounts? • Do you have other investments or assets?

20. Character • Have you had credit in the past? • How many credit accounts do you have?

21. Collateral • Do you have assets to provide to secure the loan beyond your capacity to pay the loan?

22. Activity 3: The Four C’s and Barriers to Borrowing Money • Complete Activity 3 in your Participant Guide • Why are these barriers to borrowing money? • Any problem with capital, collateral, character and/or capacity? • Assign one or more of the Four Cs to each item

23. Activity 4: Questions to Ask Before Applying for Credit • Complete Activity 4 in your Participant Guide • What questions should you ask before applying for credit? • List your questions

24. Tips for Managing Your Credit • Pay off your entire credit card bill every month • Stop using it if you can’t pay it off • Pay on time - avoid late fees • Ignore credit card offers • Be aware that money borrowed costs money

25. Predatory Lending Practices • Some sub-prime loans • Pay day loans • Mortgage loans

26. Activity 5: Indicators of Possible Predatory Lending Practices • Complete Activity 5 in your Participant Guide • In your small group, review and discuss your assigned predatory practices: • Why are these practices “predatory?” • Be prepared to explain your reasons to the class

27. Catch Phrases of Abusive Lenders “125 percent of your home/car’s value” “Incredibly low monthly payment” “No upfront fees” “Even if you have a bad credit history…” “It’s free and you have nothing to lose” “Act now, this is a limited-time offer”

28. True Cost of Alternative Financial Services • Rent-to-own services • Payday loan services • Refund anticipation services

29. Rent-to-Own • You use the item while you make monthly or weekly payments • The store owns the item until you make your final payment • Generally more expensive than a consumer installment loan

30. Refund Anticipation Loans • Short-term loans secured by your income tax refund • Money comes from a bank or finance company • Cost more than you might think

31. Do Pay your bills on time Shop around Ask for advice Take your time Be careful Don’t Respond to pressure tactics Respond to ads making lending sound cheap Don’t refinance just after signing a mortgage Be Smart! Tips

32. CONCLUSION: Todd, the Cell Phone and the Student Credit Card

33. Borrowing Basics Congratulations! You have completed the Borrowing Basics Module. You have learned: • What credit is and what “good credit” means • The different types of loans • The cost of credit and the cost of using non-loan services • How lenders make credit decisions

34. Assess Your Knowledge Don’t forget to complete the Knowledge Check in your Participant Guide.